1. ECB/Eurostat Work on Pensions in the Context of the SNA Update The 2008 World Congress on National Accounts and Economic Performance Measures for Nations Key Bridge Marriott, Arlington, Virginia 12 to 17 May 2008 Reimund Mink

2. Reasons for changing the current SNA (i)  Future treatment of employer pension schemes is one of the key issues of the current SNA update  Three reasons for changing the current SNA:  Different accounting of funded and unfunded employer pension schemes leads to different ‘effects’ on variables like income, saving, financial assets or liabilities  Unfunded employer pension schemes are particularly significant for general government and the public sector (statistical information on commitments of governments and on impacts of pension reforms)  Convergence of international statistical standards and international accounting standards (IAS) is aimed at (current SNA deviates from IAS and IPSAS which treat unfunded employer pension entitlements as liabilities)

3. Reasons for changing the current SNA (ii) Different ‘effects’ on variables Country / areaEnd-2005 Euro area53 Of which: Germany53 France59 Italy38 Netherlands167 United Kingdom140 United States96 Japan86 Holdings of (private) life insurance reserves and pension entitlements by households (as a percentage of GDP) Sources: ESCB, ONS, Federal Reserve Board, Bank of Japan, and OECD.

4. Reasons for changing the current SNA (iii) Commitments of governments Demographic projections: Process of ‘double ageing’ Projected decreasing fertility and increasing life expectancy Euro area and in the US (in Mio)

5. Recording of pension schemes in the new SNA (i)  Work done since 2002  IMF electronic discussion group (2002 – 2005)  Eurostat’s Task Force on pensions (December 2004)  IMF/BEA Task Force on pensions (September 2005)  AEG recommendations (Frankfurt 2006 meeting) to treat all employer pension schemes in the same way  Conclusions of the UN Statistical Commission (February 2006) and follow-up  Compromise (summer 2006) Flexibility of recording (refers to the treatment of unfunded government employer pension schemes) Supplementary table on pensions

6. Recording of pension schemes (ii)  Households hold pension entitlements as financial assets  Change in stock of pension entitlements between balance sheets arises from:  Social contributions (actual and imputed)  Pension benefits  Financial services  Other economic flows Revaluations Other changes in the volume of assets  Transfers between pension schemes  Pension reforms Social contributions Actual Imputed (of which: property income) Pension benefits Financial services Other economic flows Revaluations Other changes Increase in pension entitlements Pension entitlements at the end of the period Pension entitlements at the beginning of the period Opening balance sheet + incoming flows - outgoing flows = Closing balance sheet

7.  Recording of stocks and flows of government pension schemes in the updated SNA will be formally identical to the recording of non- government pension schemes Opening balance sheet + incoming flows - outgoing flows = Closing balance sheet Based on model estimations Recording of government pension schemes (iii) Opening balance sheet + incoming flows - outgoing flows = Closing balance sheet Social contributions Actual Imputed (of which: property income) Pension benefits Financial services Other economic flows Revaluations Other changes Increase in pension entitlements Pension entitlements at the end of the period Pension entitlements at the beginning of the period

8. Pension schemes in Europe (iv)  Challenges identified in Europe to implement the compromise for government employer (unfunded) pension schemes (borderline with social security pension schemes)  The predominant types of pension schemes in European countries are social security pension schemes and defined benefit (unfunded) government employer pension schemes Social insurance Individual insurance (third pillar) Social security schemes, (unfunded) general government employee defined benefit schemes (first pillar) Defined contribution schemes, private defined benefit schemes, (funded) general government employee defined benefit schemes (second pillar) Belgium Germany Greece Spain France Ireland Italy Luxembourg Netherlands Austria Portugal Finland United Kingdom United States

9. The Eurostat/ECB Task Force (v)  Mandate agreed by Committee on Monetary, Financial and Balance of Payments Statistics (CMFB) in June 2006  Methodological work (supplementary table)  Modelling work  Six Task Force meetings  Participants from ten European countries, the European Commission (ECFIN), OECD, IMF, SNA Editor  Report presented to the CMFB in January 2008 (www.cmfb.org)www.cmfb.org  Compilation Guide

10. The supplementary table (i)  Standard table for the new SNA (new chapter 17)  Covers all pension schemes in social insurance, including social security pension schemes (thus boundary of social insurance/social assistance important)  Shows pension schemes data together and helps to compile comparable national accounts  Follows stock-flow relationship and covers transaction and other flow data as economic events for changes in pension entitlements  Includes survivors and disability pensions which are part of pension schemes

11. The supplementary table (ii) Core / non-core national accounts To- tal CoreNon-core Counter- parts: Of which: Resident households SponsorNon-general governmentGeneral government Scheme Position / transaction /other flow To- tal DC sche- mes DB schemes and other non-DC schemes DC sche-mes General government employer DB schemes Social security pension schemes Of which: Schemes classified in general govern- ment Row number / column numberABCDEFGHIJ Opening balance sheet 1 Pension entitlements Transactions 2 Social contributions relating to pension schemes Employer actual social contributions Employer imputed social contributions Employee actual social contributions Employee imputed social contributions/ property income Self employed and non-employed social contributions 3 Other (actuarial) accumulation of pension entitlements in social security pension schemes 4 Pension benefits 5 Change in pension entitlements (rows 2+3-4) 6 Changes in pension entitlements due to transfers of entitlements Other economic flows 7 Revaluations 8 Other changes in volume Closing balance sheet 9 Pension entitlements (rows 1+5+6+7+8) Related indicators

12. The supplementary table – columns (iii)  Core-non-core…  Core schemes’ entitlements recorded in core national accounts  Task Force found a basket of criteria:  Degree of integration within the government structure (autonomous versus non-autonomous)  Risk exposure/ability to change the benefit formula (government does not have discretion to change unilaterally the benefit formula at any point in time and thereby partially default on its obligations)  Nature of the contract (generally not forced by law to participate)  Legal framework close to social security pension schemes  Funding (funding versus no funding)  To be developed further in the European System of Accounts (ESA) revision  Government or non-government sector  Sponsored by government or not ( concept of sponsor)  Defined contribution or defined benefit (including hybrid) schemes

13. The supplementary table – rows (iv)  Pension entitlements at the beginning and the end of the period and flows in between  Social contributions  Employer imputed social contributions are commonly calculated as a residual  Social security pension schemes have specific row to reflect lack of employer imputed social contributions  Household social contribution supplements = imputed property income on all pension schemes  Pension reforms  If affecting accrued entitlements, generally treated as transactions (other economic flows if imposed by third party)  Treatment of payments for financial services / output  Assets of pension schemes held for sole purpose of paying pensions

14. Modelling of government pension schemes (i)  Lack of significant expertise amongst statisticians, thus…  rely on experts and existing data, and  develop knowledge and modelling skills  Accrued-to-date liabilities concept  Use the actuarial approach  Need to give guidance on assumptions to improve comparability of data, but accept that sometimes data is available with assumptions already in place

15. Accrued-to-date liabilities (ADL) of a pension scheme are calculated as the present value of the current pension benefits and of the projected future pension benefits paid to all pensioners and to current workers living in the base year b: The pension entitlements of the existing retirees ( ) and the pension entitlement of the current workers (future retirees) are accrued to the base year ( ) and discounted by (1+r) for each future year (t-b) and multiplied with the corresponding number of members of the age cohort Dt,k. Modelling of government pension schemes (ii)

16. Modelling - key assumptions (iii)  Discount rate  Favour government bond yields (suitable maturity)  But corporate bond yields could be used  Treatment of real wage changes  Take account of future wage changes (ABO versus PBO)  Experience effects are transactions  Demographic data  Other assumptions in some schemes (diversity across Europe)

17. Modelling work (iv)  Task Force looked at three approaches:  National models  Pension Reform Options Simulation Toolkit (PROST) developed by the World Bank  Intergenerational accounting-based model developed by the Research Center for Generational Contracts of the Freiburg University  Results of data show:  Pensions entitlements very large, especially for social security  Models allow to carry out sensitivity analyses (by varying key assumptions)  Putting the data together is time-consuming  Developing national models requires close cooperation between the national statistical institutes, central banks and other national institutions like ministries and other government entities

18. Modelling of government pension schemes (v) Pension entitlements Government employer pension schemes (column H of the supplementary table) Social security pension schemes (column I of the supplementary table) * FUS: Social Insurance Fund; ** FER: Disability and pension Fund (farmers) CountryYearModelWage growth Pension entitlements in national currency as a percentage of GDP Germany2006FreiburgABO94241 PBO1,12949 Spain2006NationalPBO22323 France2006NationalPBO94153 FreiburgABO90250 PBO1,09361 Netherlands2006FreiburgABO204 PBO245 Poland2006FreiburgABO26025 PBO30329 CountryYearModelWage growthPension entitlements in national currency as a percentage of GDP Czech Republic2006FreiburgABO5,231162 PBO6,474200 Germany2004NationalABO4,169186 PBO5,669253 2005ABO4,136185 PBO5,268235 2006FreiburgABO5,386232 PBO6,464278 2005World BankPBO6,710289 Spain2006NationalPBO2,349240 FreiburgABO1,969201 PBO2,333238 France2005NationalPBO5,623327 2006FreiburgABO4,225247 PBO5,248293 World BankPBO5,721319 Hungary2006FreiburgABO54,272228 PBO65,220275 Netherlands2006FreiburgABO690129 PBO872163 Poland2006FreiburgABO2,695255 PBO3,037287 World BankPBO*2,579243 PBO**46444 Sweden2002NationalABO5,729242 20035,984243 20046,244243 20056,461242 20066,703236 FreiburgABO4,760168 PBO5,620198 * FUS: Social Insurance Fund ** FER: Disability and Pension Fund (farmers)

19. Modelling of government pension schemes (vi) Source: Freiburg University

20. Modelling of government pension schemes (vii) Source: Freiburg University

21. Next steps  Follow-up  Draft Chapter 17 of updated SNA  Revised ESA will draw on Task Force work  Questionnaire in the first half of 2008  Eurostat/ECB seminar in early 2009  Contact Group established for country experts  Feedback to CMFB in January 2009  Since work on pensions is complex, countries should start work early on implementation  Support by:  Compilation Guide  Further modelling work on pensions